A Conversation About America's Retirement Crisis with Dr. Teresa Ghilarducci

A professor of economic policy analysis at The New School, Dr. Teresa Ghilarducci is a nationally recognized expert on retirement policy and is the author of a number of books on the issue, including When I’m Sixty-Four: The Plot Against Pensions and the Plan to Save Them. She recently talked with Urban Matters about the proposal by her and others to close retirement savings shortfalls by creating guaranteed retirement accounts.

UM: How would you describe America’s retirement crisis? How big is it?

Ghilarducci: Millions of Americans who are now approaching retirement simply don’t have enough in savings to keep them out of poverty when they stop working. They’ll have to keep working after they reach what we think of as retirement age. That will be difficult for older people; they’ll often have to work in jobs that are beneath them – beneath what they’ve previously done for a living and with wages beneath what they’ve previously earned. It will impact the labor market for younger people as well; it will mean lower wages for them because of the competition from older workers. So the effects will be felt throughout the economy.

UM: How did we get into this fix?

Ghilarducci: We have an employer-based retirement system that’s broken because employers have increasingly abandoned [defined-benefit] pensions and instead adopted [largely self-financed] 401(k) defined-contribution retirement systems. That’s inadequate, because 401k’s shift investment risks onto workers who are overwhelmed by them, and would be even if they were afforded the best conceivable financial education, which they’re not. Plus they’re in no position to diversify their portfolios. Employers also offer bad investment choices through these plans, because they’re dependent on investment brokers who sell high-priced, risky assets.

The situation is bad across the country; it’s even worse in New York City. Research by me and my colleagues Joelle Saad-Lessler and Kate Bahn shows that in 2011 only 41% of workers in the city had either a defined benefit plan or 401(k). That’s down from 49% in 2001.

UM: How would guaranteed retirement accounts work, and why would they be better?

Ghilarducci: Federally guaranteed retirement accounts (GRAs) would help anyone who doesn’t currently have a [defined benefit] retirement plan. Participation would be mandatory; businesses and workers would have to contribute [a shared] 5% of earnings to an account which would be managed by the government and have a federally guaranteed rate of return. The administrative costs would be a fraction of the costs of privately offered retirement plans. The track record of places that have GRAs – Australia and the Netherlands, for example – shows that they work.

UM: But how could low-income workers afford such a system?

Ghilarducci: GRA’s would be made affordable to working people by providing a refundable income tax credit of $600 to every participant; it would be structured like the current Earned Income Tax Credit for low-income workers. Everyone, rich or poor, would get the same amount; obviously the relative benefit of that would be greater for low-income earners.

Keep in mind that under today’s tax law the Federal government now spends $120 billion a year subsidizing retirement savings plans, in the form of an income tax deduction. But the current incentives are precisely upside-down. Right now, if you’re in the [highest] 39% income tax bracket, for every $1,000 you save you get $39 back. But if you’re in the 15% tax bracket – and that’s most working people and people who need retirement savings the most – you get only $15 back for every $1,000 saved.

UM: One of the most active supporters of GRAs is Tony James, president of Blackstone, the giant private equity firm. You were interviewed together in The New York Times in December. How did this come about?

Ghilarducci: We come to this problem from different perspectives. I come at it from an academic perspective. As a major investment manager, he’s concerned about what happens to our economy when so many old people become poor. He read my proposal for GRAs in a 2008 book and that’s how we became partners.

UM: Although you advocate a Federal system, you’ve encouraged a strategy of state-by-state adoption of GRAs. Why is that, and what’s the current status of this movement?

Ghilarducci: The states of Washington and Illinois have enacted guaranteed savings plans; other states are in the process of implementing them, and still others are considering legislation. That includes New York; in this year’s State of the State address, Governor Andrew Cuomo announced that he intends to appoint a blue-ribbon commission to study options for creating a State-administered retirement savings program for workers not covered by employer retirement plans.

We think that this state-by-state approach will eventually lead to a federal plan, because employers don’t want to have to deal with state-by-state plans; they want to work with a single, uniform system. History is a good guide. Before Social Security was enacted, 23 states had legislation before them to establish some form of old-age pension. When Social Security came in in 1935, all those proposed state systems disappeared.